A-Mark Precious Metals Inc. (AMRK, Financial) is a leading precious metals trading company with multiple businesses under its umbrella.
Founded in 1965, A-Mark has grown to become a major player in the global precious metals market, with offices and distribution centers located around the world and a strong online presence with sites like goldprice.org and silver.com.
Last year’s acquisition of JM Bullion and the new CyberMetals.com platform, which came online earlier in 2022, add to its lineup of long-standing websites and should continue to build upon an already incredible business. It reminds me of a Signet Jewlers (SIG, Financial) or Luxottica (XPAR:EL, Financial), but direct to consumer instead of needing to operate a network of retail locations with all the costs and headaches attached.
The company's primary business is the trading of precious metals, including gold, silver, platinum and palladium, in a variety of forms, including coins, bars and rounds. A-Mark offers a range of other products and services, including storage and financing options for precious metals buyers and sellers. In addition to its trading business, the company operates a mint, which produces a variety of precious metal coins and bars for investors and collectors. It has a long history of producing high-quality, sought-after coins and has developed a reputation for excellence in the industry. As such, it appears the precious metals industry is a good business be in.
Business model
A-Mark operates through three segments.
First up is Direct to Consumer, through which subsidiaries JM Bullion and Goldline sell precious metal products directly to consumers via e-commerce chanels. The company has recently prioritized the retail sector, working to digitize its precious metal bars and expand its customer base through e-commerce acquisitions. This now includes storage via CyberMetals.
The second division is Wholesale. Through this business, A-Mark buys and distributes precious metals from sovereign and private mints in the U.S., Australia, Austria, Canada, China, Mexico, South Africa and the United Kingdom.
Lending is the third business. A-Mark has two subsidiaries that specialize in providing loans secured by bullion and numismatic coins. This segment generates revenue mainly through interest income.
Combined, A-Mark generated $151 million in net earnings on $8 billion in total revenue over the last 12 months. That was good for a 35% return on equity and $260 million in free cash flow. It runs lean with just 384 employees.
More importantly, A-Mark has an enterprise value of just $871 million with a price-earnings ratio of 6. That includes $65 million in cash and $390 million in total debt, which should not be a problem as the interest income it produces covers the interest expense on the debt at roughly one to one.
Potential developments
Gold has been used as a form of money for thousands of years and is now vital to our technology sector, which means it will likely remain above a certain price. Also, during times of economic volatility, many investors turn to bullion markets as a safe haven to protect against inflation. Precious metals have a long history of being a reliable investments in such conditions. A-Mark is well positioned to benefit from the current market.
A couple of things could happen here. First, investors could see a multiple expansion where the price-earnings ratio expands two to three times. At 15 times earnings on next year’s estimate of $5.08, the stock could very well be at $75.
Second, the company could up the dividend from 80 cents to $2 to $3 per share as it has an ultra low capital expenditure rate. I do not see it continuing to grow rapidly without more rollups unless the price of gold, silver and other precious metals skyrockets in dollar terms. That is not likely even with inflation at 8%. Maybe the fear of further dollar value destruction could cause more buyers to enter the gold market, especially after the cryptocurrency collapse, but I do not know if that is likely either.
A-Mark's business is primarily driven by volume and the spreads between the commodity spot price and the price at which it sells the coins and bullion. For example, the current price of gold as listed on goldprice.org is $1,816 and A-Mark sells a 2022 1 oz. American Gold Buffalo Coin for $1,965, which represents a premium of about 8% or $149. If the price of gold were to increase to $2,500, that same 8% spread would equal $205, resulting in higher gross profits and earnings potential. However, if metal prices were to fall significantly, it would not lead to a significantly lower premium and could mean higher demand. Gold bugs are still going to buy if prices fall back to $1,200 even if the markup remains above $100. In fact, the older the coin is, the more valuable it becomes as a collectible.
Conclusion
Mr. Market will not keep the value this low forever. A-Mark has solid fundamentals and a group of earnings producing assets that should keep the cash flowing. With the company expected to earn over $5 per share in 2023, a 10 times multiple would mean a 42% return and I think it could be a lot higher. That said, I believe gold and silver are going a lot higher, possibly to $3,000 and $70 an ounce, respectively, in the next five years.
It is not certain that A-Mark would be able to mark up a gold coin $300, but there will be people willing to pay that. With no increase in customer volume, that would put sales in the $15 billion to $16 billion range and net income at $300 million. You can do the math from there.
